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How can we expect businesses to drive positive environmental change when they remain locked in competition to meet consumer demand for a wide range of products and services at the cheapest price possible?
In the UK, this is a question that the Competition and Markets Authority (CMA) has been contemplating for some time as it considers how it can best help facilitate the development of more sustainable markets as part of its broad macro-economic remit. In some ways the issues are already being driven by the market itself, with an increasing number of consumers now looking beyond price and quality, placing equal (if not greater) emphasis on the product’s sustainability credentials. The CMA’s Green Claims Code recognises this and aims to ensure that businesses that genuinely invest in sustainability are not placed at a competitive disadvantage by those that engage in ‘greenwashing’. Read more on this in our Green Claims Outlook 2023.
But coming at this from a competition law perspective, is it possible that UK antitrust rules could hold industries back that want to “do the right thing” by working together to help solve industry-wide sustainability problems? This was a question initially posed by BEIS in a letter from Kwasi Kwarteng to the CMA back in July 2021. While there are certain established circumstances where rival businesses can work together if there is clear evidence of a pro-competitive outcome (e.g. cheaper prices for consumers or product innovation), the extent to which the CMA could take into account the environmental benefits of any direct co-ordination between competitors hasn’t always been clear.
The CMA’s new draft guidance on Sustainability Agreements provides some clarity on this debate and will, once finalised, offer a valuable point of reference for businesses seeking to navigate this space. Fundamentally, the draft guidance confirms that the CMA can take into account environmental and sustainability benefits when assessing whether a “horizontal” agreement between competitors complies with Chapter I of the Competition Act 1998. This approach, which closely adheres to the position taken by the European Commission in its corresponding guidance at EU level, represents an important preliminary step in the competition law assessment of these types of collaboration, in circumstances where the limits have been dictated by more conventional economic metrics, such as whether an agreement is likely to result in higher or lower prices. More importantly, for competition practitioners and businesses, the draft guidance puts more ‘meat on the bones’ with specific examples.
Businesses or trade associations that wish to explore new ways to drive sustainable change at industry level will find the CMA’s draft guidance very helpful. It sets out a number of different types of environmental sustainability agreements that may be deemed compatible with the Competition Act. For example, these include:
Phasing out or withdrawal of non-sustainable products or processes;
Creation of industry standards that promote sustainability;
Pooling sustainability credentials on suppliers or customers;
Industry-wide efforts to tackle climate change; and
Co-operation on sustainable R&D.
We have considered each of these areas in the dropdown boxes below.
Note that the CMA defines ‘environmental sustainability agreements’ broadly, which means that the guidance can apply to any initiative that is aimed at reducing the adverse impact of economic activity on the environment. This could include, for example, reducing pollution and CO2 emissions, as well as conserving biodiversity, improving air or water quality or promoting the sustainable use of raw materials.
Assuming there is industry-wide consensus that a particular product or process is harmful from an environmental perspective, can competitors come together and agree to phase out that harmful product (or process) and replace it with a more sustainable alternative? Doing so may help reduce the so-called ‘first mover disadvantage’ that could deter individual business from 'going it alone'.
On this point, the CMA’s draft guidance states that as long as the decision to phase out the harmful product/ process does not involve an appreciable increase in price for consumers (or reduction in product choice) such an agreement is unlikely to have an adverse impact on competition.
The CMA gives the example of businesses agreeing to stop using a particular type of packaging and replacing it with an alternative packaging process that is more sustainable. According to the CMA’s draft guidance, this agreement would be unlikely to breach competition rules provided that the parties involved have data to show that the switch could be made without economically disadvantaging consumers in the form of higher prices/ reduced choice.
This reflects the position taken by other competition authorities. For example, in July 2022, the Netherlands Authority for Consumers and Markets (ACM) announced that it supported an agreement between six soft drink suppliers (including Coca-Cola and two supermarket chains) to discontinue plastic handles on all soft drink and water multipacks. After analysing the agreement upon the request of the suppliers, the ACM found that the agreement would not have a negative impact on consumers, either in terms of reduced quality or higher pricing.
Of course, in practice, it is quite feasible that some decisions to switch to more sustainable processes will result in higher prices (or less choice/ reduced quality) for consumers. In such cases, the businesses involved would need to conduct a careful assessment of the effects of the agreement to determine whether the exemption under s9(1) of the Competition Act is available.
The CMA gives the example of rival furniture producers who collectively decide not to import or produce furniture made from wood grown unsustainably, which results in significantly higher prices for consumers. The s9(1) exemption could be applicable in this case if consumers are in fact willing to pay higher prices for furniture made from sustainable wood because they value the indirect benefit of not contributing to deforestation alongside the more direct benefit of improved quality or longevity for the furniture. However, the CMA points out that it would expect to see clear evidence to demonstrate that consumers value those benefits (in a way that would balance the disadvantage of higher prices), for example robust consumer survey evidence.
Gathering this evidence may be easier said than done, not least as consumer sensitivities to different product attributes – sustainability versus price – may be influenced by macro-economic factors such as the cost-of-living crisis; however, the guidance suggests that the CMA is not exclusively interested in weighing one dimension against another precisely, but rather whether there is genuine consumer appetite for more sustainable solutions that are supportive of the cooperation in question.
Finally, it is also important to consider agreements of this nature from the perspective of the firms that supply the product or service that are being phased out. If the parties collectively agree (in effect) not to purchase from a particular provider because of the poor environmental impact of their products/ services, this could be viewed as a collective boycott from the supplier’s perspective. While horizontal collective boycotts of this nature can raise serious competition risks, the CMA’s draft guidance suggests that a more permissive approach will be taken when the objective of the (effective) boycott is to improve environmental sustainability and the focus is on the products themselves. This is on the basis that the purpose of the agreement would be to eliminate unsustainable products from the supply chain rather than to force a particular supplier out of the market on economic grounds. Nevertheless, such an agreement would require careful analysis of the market context to ensure compatibility with competition rules.
Increasingly, there is a push within certain industries to develop uniform standards aimed at making products or processes more sustainable across the industry.
The CMA’s guidance is clear that co-operation between competitors to develop standards or codes of practice of this nature is unlikely to have an appreciable negative effect on competition.
However, this is subject to the following conditions:
The participation criteria must be transparent.
Firms must not be obliged to participate in the standard if they do not wish to do so (albeit the standard may oblige those businesses who have committed to participate in the standard/code of practice to comply with the standard and may provide for a mechanism to monitor such compliance).
It must be possible for any firm to participate or benefit from the standards/codes of practice on reasonable and non-discriminatory terms.
Participating businesses must be free to develop alternative standards and to sell products that fall outside of such standards or codes.
Participating businesses must be free to go beyond minimum sustainability targets set by the standard.
Businesses that wish to reduce emissions and improve sustainability within their supply chain will often find that they lack the necessary data to “grade” their suppliers according to their sustainability credentials.
In order to overcome this information gap, competitors who operate within the same market may find it helpful to pool information in relation to suppliers so that they are better placed to reach independent decisions in relation to their own supply chains. This could, for example, include information on which suppliers have sustainable production processes, provide sustainable inputs or have environmentally sustainable value chains.
This may be equally applicable for suppliers looking down the supply chain to evaluate the performance of their customers, for example in relation to their recycling and environmental disposal practices.
In both cases, the CMA acknowledges that pooling this kind of information may be permissible, although co-operating in this way can give rise to appreciable competition risks. In particular:
the information must be strictly limited to the pooling of sustainability credentials. Competitors must not share competitively sensitive information about prices or quantities purchased from (or supplied) to the suppliers or customers in question; and
the parties should be free to use the pooled data independently. If the agreement extends to a mandatory requirement to only deal with (or not deal with) specific parties, this is likely to require a more careful and detailed assessment from a competition law perspective.
In the latter case, if the parties were to collectively agree not to deal with suppliers who do not meet certain sustainability standards, this could be considered a form of collective boycott. As noted above (see ‘Phasing out non-sustainable products or services’) the CMA has indicated that it may adopt a more permissive approach towards collective agreements where the intention is to eliminate unsustainable practices in the supply chain, but caution is advised as this is a sensitive area.
The CMA’s draft guidance confirms that the setting of non-binding industry targets or ambitions for the whole industry with regard to environmental sustainability objectives (e.g. CO2 emissions) are unlikely to have an appreciable negative effect on competition.
This kind of agreement might include:
the development of a common methodology (available on an open-source basis) allowing industry participants to calculate and report the emissions associated with their business activities in absolute terms; and
the establishment of a common framework for target setting, including which emissions and business activities are within the scope of the common framework. The CMA points out that such a framework could allow for the unilateral setting, disclosure and reporting of the participants’ targets, as well as how – in broad terms – the participants intend to meet their targets and the participants’ progress towards meeting those targets.
As always though, the devil will be in the detail. Industry bodies and trade associations should ensure that there are no harmful ‘spillover’ (wider commercial coordination) effects on competition as a result of the increased industry co-operation in this area.
Thankfully, the CMA has indicated that it is prepared to take a more permissive approach to the s9(1) exemption under the Competition Act for what it refers to as “climate change agreements”. In particular, this means that when assessing whether consumers receive a “fair share” of any benefit arising from the agreement, the parties can point to the wider benefit that all consumers receive from combatting climate change without needing to identify specific benefits conferred on the more narrow category of consumers who purchase the relevant goods or services produced in their own market.
 The draft CMA guidance states that these are the kinds of agreements that contribute towards the UK’s binding climate change targets under domestic or international law. They will typically reduce the negative externalities from greenhouse gases, such as carbon dioxide and methane, emitted from the production and consumption of goods and services
There may be cases where a firm wishes to launch a new R&D initiative with an environmental benefit but lacks the technical or financial resources to progress their ideas independently. Working together with competitors who are active in the same market (and may therefore be facing the same challenges) has the clear potential to benefit consumers by driving sustainable innovation in a way that would not be possible if the parties did not co-operate.
The CMA gives the example of several housing corporations participating in a pilot project to develop zero-energy housing using a novel, more efficient technology in a particular area. As the housing corporations may each individually lack the resources or capabilities to undertake the project individually, such an agreement is unlikely to raise competition concerns in principle.
The draft guidance also refers to a situation where competitors cooperate in early-stage scientific or technological research with an environmental sustainability objective. Again, if the parties have complementary skills that would enable the research to develop in a way that would not have been possible had the parties each worked independently, the draft guidance states that this is unlikely to raise competition concerns. Indeed, in some cases R&D agreements may benefit from the existing Research and Development Block Exemption Order.
It’s nevertheless important to remember that the CMA does still expect businesses to compete to drive technical innovation for more sustainable products and services. This means that when assessing the risks associated with R&D co-operation, businesses should satisfy themselves that any co-operation in this space does not undermine the ability of the parties to compete in this space.
Therefore, in all cases the businesses involved would need to be alive to the knock-on risks associated with strategic co-operation, for example by ensuring there are processes in place to ensure that the parties to do not exchange commercially sensitive information that could result in weaker competition between the parties.
It’s important to be aware that no matter how laudable the parties’ intentions are, from a competition law perspective no agreements between competitors can ever be considered totally “risk free”.
In its draft guidance, the CMA states that there are (broadly speaking) two different types of agreement:
Agreements that do not affect the main parameters of competition in the market – i.e. they will not have any impact on price, quantity, quality, choice or innovation. The CMA gives the example of competitors working on a joint campaign to raise awareness about environmental sustainability issues within their industry as an example of an agreement that would likely fall into this low-risk category. Still, while agreements of this nature may be relatively benign in isolation, the parties should nevertheless ensure that the increased co-operation does not lead to any harmful ‘spillover’ effects by gradually dampening competition in other areas, such as pricing or product innovation. In some cases procedural safeguards may need to be put in place to manage those risks.
The second type of environmental sustainability agreement are those that do have an appreciable effect on competition, for example because they result in less consumer choice or higher prices. An example would be where a group of competing manufacturers collectively agree to transition to a more sustainable production method that results in higher production costs that will be passed on to consumers in the form of higher prices. In this case, the parties would need to show that the agreement is capable of benefiting from the exemption under section 9(1) of the Competition Act to move forward. In practice, this involves a complex balancing of the pro- and anti-competitive effects of the agreement.
It is the latter form of agreement that has prompted the most academic debate amongst competition law practitioners who have traditionally been more accustomed to weighing up pure economic factors when assessing an agreement’s compatibility with the Competition Act. The CMA’s draft guidance confirms that environmental sustainability benefits can be taken into account when assessing whether consumers receive a “fair share” of the benefit of any agreement, but as the examples above show, the position is rarely straightforward. All agreements need to be assessed in their economic context.
In its guidance, the CMA indicates that it is operating an “open door” policy and is prepared to enter into dialogue with businesses that seek guidance on whether certain initiatives are likely to be compatible with competition rules (which, although not the same, echoes the position before May 2004 when businesses could notify agreements for clearance). The CMA has also indicated that it will not seek to impose penalties on businesses that have sought advice in an open and transparent manner, provided that the CMA did not raise any objections during the consultation process.
There are certain types of conduct that are considered to be so harmful to competition that they would infringe competition rules even if agreed in the context of an (ostensibly) well-intentioned environmental sustainability agreement – examples being price fixing or market sharing agreements.
In addition, as noted above, competition regulators are clear that they do expect the market to drive competition and innovation for more sustainable products and services. This means the CMA is likely to intervene if it suspects that competitors have deliberately agreed not to compete to the best of their ability in order to insulate themselves from market pressures driven by consumer demand for more sustainable practices. In other words, unsurprisingly, sustainability cannot be used as a cover for unacceptable restrictions of competition or disguised cartels.
A good example of this is the European Commission’s decision to impose fines in excess of €875 million on BMW and Volkswagen Group for colluding on technical development in the area of nitrogen oxide cleaning. In that case, it was found that the car manufacturers possessed the technology to reduce harmful emissions beyond what was legally required under EU emission standards, yet they agreed not to compete on using the technology's full cleaning potential above and beyond what was required by law.
This EU car manufacturers case is a good example of how legitimate technical co-operation on environmental sustainability issues can lead to serious antitrust violations if not adequately controlled.
The CMA’s draft guidance is currently subject to an open consultation process and stakeholders have until 11 April 2023 to respond.
If you would like to discuss your own response to the consultation, our team of competition and ESG specialists would be happy to assist. Alternatively, get in touch if you would like to contribute to TLT’s own response to the consultation.
14 March 2023